Test bank for principles of economics 2nd by mankiw chapter 30b

Chapter 30/A Macroeconomic Theory of the Open Economy  81

Chapter 30A Macroeconomic Theory of the Open EconomyTest B1

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Which of the following concerning the open­economy macro model is correct?a. It assumes that real GDP is fixed.b. It assumes that the interest rate adjusts to bring the supply of and demand for money into balance.c. It considers what happens simultaneously in the money market and the market for foreign currency.d. All of the above are correct.ANSWER: a. It assumes that real GDP is fixed.TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y2

Jack and Jill are co­owners of the U.S. firm Wells Petroleum. Jack builds an oil well in Texas. Jill builds an oil well in Venezuela.a. Neither Jack’s nor Jill’s purchase of capital count as demand for loanable funds in the U.S. market.b. Jack’s purchase of capital counts as demand for loanable funds in the U.S. maket; Jill’s purchase does not.c. Jill’s purchase of capital counts as demand for loanable funds in the U.S. market; Jack’s purchase does not.d. Both Jack’s and Jill’s purchase of capital count as demand for loanable funds in the U.S. market.ANSWER: d. Both Jack’s and Jill’s purchase of capital count as demand for loanable funds in the U.S. market.TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y4

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Other things the same an increase in the U.S. real interest rate relative to real interest rates in other countries a. decreases the quantity of loanable funds supplied in the U.S. market.b. decreases U.S. domestic investment.c. increases U.S. net foreign investment.d. All of the above are correct.ANSWER: b. decreases U.S. domestic investment. TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y

Which of the following would increase both the real interest rate and the quantity of loanable funds?a. The supply of loanable funds shifts left.b. The supply of loanable funds shifts right.c. The demand for loanable funds shifts left.d. The demand for loanable funds shifts right.ANSWER: d. The demand for loanable funds shifts right.TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y6

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Which of the following would be shown by shifting the supply of loanable funds right?a. People want to save more at each interest rate.b. People want to invest more domestically at each interest rate.c. People want to purchase more foreign capital at each interest rate.d. All of the above are correct.ANSWER: a. People want to save more at each interest rate.TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y7

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In the open­economy macroeconomic model, which of the following happens in response to an appreciation of the real exchange rate?a. The quantity of dollars demanded in the foreign­exchange market increases.b. The quantity of dollars demanded in the foreign­exchange market decreases.c. The quantity of dollars supplied in the foreign­exchange market increases.d. The quantity of dollars supplied in the foreign­exchange market decreases.ANSWER: b. The quantity of dollars demanded in the foreign­exchange market decreases.TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y8

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If the real interest rate in the United States falls relative to real interest rates in other countries, U.S. net foreign investmenta. increases, the supply of dollars in the foreign exchange market shifts right, and the real exchange rate of the dollar appreciates.b. increases, the supply of dollars in the foreign exchange market shifts right, and the real exchange rate of the dollar depreciates.c. decreases, the supply of dollars in the foreign exchange market shifts left, and the real exchangerate of the dollar appreciates. d. decreases, the supply of dollars in the foreign exchange market shifts left, and the real exchangerate of the dollar depreciates.ANSWER: b. increases, the supply of dollars in the foreign exchange market shifts right, and the real exchange rate of the dollar depreciates.TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 1 RANDOM: Y9

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In the open­economy macroeconomic model, if the real exchange rate was above the equilibrium level, which of the following would rise?a. the real exchange rateb. net exportsc. net foreign investmentd. All of the above are correct.ANSWER: b. net exportsTYPE: M KEY1: D SECTION: 2 OBJECTIVE: 1 RANDOM: Y

Which of the following would increase the real exchange rate?a. the demand for loanable funds shifts leftb. the supply of loanable funds shifts rightc. an increase in the demand for dollars in the foreign­currency exchange marketd. All of the above are correct.ANSWER: c. an increase in the demand for dollars in the foreign­currency exchange marketTYPE: M KEY1: D SECTION: 2 OBJECTIVE: 1 RANDOM: Y12

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In recent years the budget deficit of Thailand has increased. According to the open­ economy macroeconomic model this should have caused which curve to shift right?a. the Thai supply of loanable fundsb. the Thai demand for loanable fundsc. the supply of Thai currencyd. None of the above shift rightANSWER: d. None of the above shift rightTYPE: M KEY1: D SECTION: 3 OBJECTIVE: 2 RANDOM: Y13

Ara drew the effects of an increase in the government deficit in the diagram shown. What, if any, mistake did Ara make?a. Instead of drawing the supply curve in the loanable funds market shifting left, he should have drawn the demand curve shifting right.b. He should have also drawn the NFI curve shifting left.c. He should have also drawn the demand for dollars shifting left.d. Ara made no mistakes.ANSWER: d. Ara made no mistakes.TYPE: M KEY1: G SECTION: 3 OBJECTIVE: 2 RANDOM: Y GRAPH: 1NOTE: THE FOLLOWING QUESTION IS REPEATED FROM THE ON­LINE QUIZZES. YOUR STUDENTS MAY HAVE ALREADY SEEN THIS QUESTION AND ITS ANSWER.15

Suppose sheep ranchers in Tiberius convince the government to prohibit the import of wool into Tiberius. According to the open­economy macroeconomic model this will cause the Tiberian currency toa. appreciate and decrease net exports.b. appreciate, but have no effect on net exports.c. depreciate, but have no effect on net exports.d. depreciate and increase net exports.ANSWER: b. appreciate, but have no effect on net exports.TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 3 RANDOM: Y17

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Suppose that conservationists in Sherwood convince the government to prohibit the export of timberfrom Sherwood. According to the open­economy macroeconomic model this willa. reduce Sherwood’s net exports, and cause their real exchange rate to appreciate.b. reduce Sherwood’s net exports, and cause their real exchange rate to depreciatec. have no effect on Sherwood’s net exports, and cause their real exchange rate to appreciate.d. have no effect on Sherwood’s net exports, and cause their real exchange rate to depreicate.ANSWER: d. have no effect on Sherwood’s net exports, and cause their real exchange rate to depreicate.TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 3 RANDOM: YNOTE: THE FOLLOWING QUESTION IS REPEATED FROM THE ON­LINE QUIZZES. YOUR STUDENTS MAY HAVE ALREADY SEEN THIS QUESTION AND ITS ANSWER.18

. The restriction on imports of Japanese vehicles into the United States has: a. caused the real exchange rate to appreciate.b. caused net exports in the United States to decline.c. decreased the demand for loanable funds in the United States.d. increased net foreign investment in the United States.ANSWER: a. caused the real exchange rate to appreciate.TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 3 RANDOM: Y

Supposing that the economy starts at r1 and E1, which graph is the right one for showing the effects of restrictive trade policies?a. Diagram Ab. Diagram Bc. Diagram Cd. None of the above is correct.ANSWER: b. Diagram BTYPE: G KEY1: D SECTION: 3 OBJECTIVE: 3 RANDOM: Y GRAPH: 2NOTE: THE FOLLOWING QUESTION IS REPEATED FROM THE ON­LINE QUIZZES. YOUR STUDENTS MAY HAVE ALREADY SEEN THIS QUESTION AND ITS ANSWER.21

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The country of Monac experiences a coup that causes capital flight from the country. As a resulta. net foreign investment in Monac will decrease.b. the demand for loanable funds in Monac will increase.c. the supply of loanable funds in Monac will increase.d. the exchange rate in Monac will increase.ANSWER: b. the demand for loanable funds in Monac will increase.TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y

Between 1992 and 1999 it is estimated that Russia had capital flight of about $150 billion. Other things the same, we would expect that this capital flight has resulted ina. falling domestic interest rates and an appreciation of the Russian currency.b. falling domestic interest rates and a depreciation of the Russian currency.c. rising domestic interest rates and an appreciation of the Russian currency.d. rising domestic interest rates and a depreciation of the Russian currency.ANSWER: d. rising domestic interest rates and a depreciation of the Russian currency. TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y23

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If people feel that it has become riskier to buy the capital assets of some country, perhaps because of increased political instability, then interest rates a. rise and the local currency depreciates.b. rise and the local currency appreciates.c. fall and the local currency appreciates.d. fall and the local currency depreciates.ANSWER: a. rise and the local currency depreciates.TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y24

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If there is capital flighta. both the supply of loanable funds and the supply of the local currency in the foreign exchange market shift right.b. both the supply of loanable funds and the demand for the local currency in the foreign exchange market shift left.c. both the demand for loanable funds and the supply of the local currency in the foreign exchange market shift right.d. None of the above is correct.ANSWER: c. both the demand for loanable funds and the supply of the local currency in the foreign exchange market shift right.TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y25

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Which of the following raises interest rates and causes appreciation of the local currency?a. capital flightb. restrictrive trade policiesc. an increase in the budget deficitd. All of the above are correctANSWER: c. an increase in the budget deficitTYPE: M KEY1: D SECTION: 3 OBJECTIVE: 4 RANDOM: Y